What product(s) does the company offer? Which stage are its products at in the product life cycle?
What are the advantages and disadvantages of the product? Does the product have features that differentiate it from products offered by competitors (in which case, pricing can be based upon demand), or is it a commodity that an only really be differentiated by cost (meaning cost-based pricing would apply)?
- Demand/Customer-based Pricing: this involves suppliers deciding which price to charge based on the level of demand from customers for the product. If a product is in high demand, the price charged will increase. If demand falls, so too will the price. The price is therefore based more on the perceived value of the product rather than the cost of producing it.
- Cost-based Pricing: this involves suppliers basing the price they charge on the cost of producing the product plus a mark-up (thus giving them a profit margin). This pricing strategy would result in a supplier reducing the price charged if it managed to reduce costs, or increasing the price charged if costs increased.
- Product Life Cycle: the period over which a product enters and eventually exits the market. The number of sales typically increases after a product is released and initially marketed. The number of sales then tends to stabilise and eventually diminish as more competitors enter the market and the product is replaced by cheaper or superior alternatives.
Is the product protected by intellectual property (e.g. patents)? If so, for how long? How easily can the competitors replicate the product and market it as their own?
- Intellectual Property (IP): IP rights such as copyright, patents and trademarks can prevent others profiting from your ideas, inventions and brands, or causing reputational damage. Exclusive rights over intellectual property can afford clients a dominant market position and in the context of an acquisition, purchasers will typically want to ensure that the seller’s IP rights are included in the sale. The seller could otherwise simply start up another similar business soon afterwards and compete with the purchaser.
How should we position the product? Should it be sold as an expensive luxury good or a cheap basic good?
Can we cross-sell or up-sell products to our customers? Can we offer other goods/services to customers on top of the primary good/service? For instance, if we are an Internet service provider, do we have other products that our existing customers will want (for instance, television packages or landline contracts)?
- Cross-sell: cross-selling products means selling related or complimentary products to existing customers. For instance, suppliers of appliances/electronics might try to sell warranties to customers that have purchased an appliance/electronic device. Internet service providers may also offer mobile phone contracts as part of a bundle with their core product etc.
- Upsell: upselling involves trying to persuade a customer to purchase a more expensive version of a product. For instance, a car manufacturer may try to persuade customers to purchase a car model with upgraded features, whilst an Internet service provider may try to persuade customers to purchase higher-speed Internet (at greater expense).
Are there supply/demand forces that could affect sales of the product? Consider complementary and substitute goods. If it wants to grow, should the company develop new products or attempt to sell more existing products?
- Supply: the quantity of a product or service available for consumers to purchase at a specific price.
- Demand: the quantity of a product or service that consumers are able and willing to purchase at a specific price.
- Substitute Goods: products that a consumer could purchase to satisfy the same purpose, need or want as a different product sold by another company. For instance, a train ticket may be a substitute for a plane ticket (if the route is similar) and if the price of rail travel drops, consumers may consequently decide to take a train rather than fly where possible.
- Complementary Goods: products that can or must be purchased alongside another product. For instance, petrol is a complementary product to cars. If the price of petrol dramatically increases, consumers may (in the long term) be less inclined to purchase cars.
Which distribution channels are being used and what are their advantages and disadvantages? Are there other more beneficial options available? How much does each element of the value chain (e.g. raw materials, manufacturing, packaging, distribution) contribute to the overall cost of producing a product? Is there a particular element that is significantly adding to the total cost of producing the final product?
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By Jake Schogger - City Career Series